12/18/2018 Morning Comments

Good Morning,


Crude oil is sharply weaker again this morning, dropping below the $50.00/bbl level and trading to the lowest level since September 2017.  This washed out the Bloomberg Commodity Index yesterday which hit the lowest level since June 2017.  When trading opens later this morning, the BCI should hit fresh lows for the move once again.  Last week, crude oil inventories in the United States eclipsed year ago levels for the first time this year.  Despite the planned OPEC+ cuts to production, U.S. shale driller are under no such mandate and are only now getting the price signal to slow pumping.  Weak energy markets are obviously not a bullish input for grains or the larger economy, at least not in the short-term.  Crude should find support near the 45-handle area, otherwise more stable support exists in the 42-handle area.

Weather forecasters over the weekend and yesterday were touting dryness in S-Brazil, specifically in Parana and Mato Grosso do Sul.  This area has been trending dry the last couple of weeks, but 6-10 day maps are putting fairly soaking rains over this region after above normal heat blankets the states.  If the forecasted rains fall, it should end concerns in the near-term, but the rains do need to verify to prevent yield loss.  Social media discussed the first soybeans coming off fields in Mato Grosso which would be about 2-4 weeks ahead of schedule.  With beans already coming off, and many areas comfortable with double crop soybeans, the harvest in Brazil and Argentina is going to seem as though it will never end this year.


Mixed markets this morning with soybeans and corn firmer and wheat markets taking a step back.  The feature yesterday was optimism regarding additional Chinese purchases, including corn and wheat but announcements were lacking yesterday.  Media outlets suggested China will become a much more measured buyer moving forward so as to not run the market up on themselves.  If tariffs on soybeans are removed, Brazilian and U.S. soybeans will be locked in a dog fight February through June which does not portend higher prices.  In addition, market participants seem to be realizing that unless China buys more than 8-10MMT, their purchases just aren’t going to be enough to materially change the 900mbu+ carryout projected by the USDA.  U.S. wheat remains in a fairly competitive position relative to other global exporters as export inspections notched the best week of the marketing year by a country mile.  The question now becomes if there is enough time to take advantage of being the only game in town before importers can make the transition to Northern Hemisphere new crop.  Corn open interest was up 5,621 contracts yesterday, soybeans were down 2,352, SRW was down 388 and HRW was down 498.

Export inspections released yesterday saw wheat surge to 25.1mbu, the largest of the marketing year and the first time this season we’ve hit the needed level of inspections.  The 25.1mbu was better than the 22.0mbu needed weekly but total inspections are still down 14.9% from a year ago while USDA is calling for a 12% increase.   Corn inspections were disappointing at 34.8mbu, essentially unchanged from the previous week and below the 44.8mbu needed weekly to hit the USDA’s objective.  Total inspections are up 73% from a year ago at 629.5mbu, providing a huge buffer for a few weeks of light inspections as exporters focus on soybeans and wheat.  Soybean inspections were decent at 35.8mbu vs. the 34.4mbu needed weekly.  Total inspections remain down 41.5% from a year ago vs. USDA calling for an 8% drop y/y.  With only a month left until soybean harvest really picks up in Brazil, it remains difficult to see how we will hit the USDA export objective as it stands today.

Yesterday also saw November NOPA crush released which came in at 166.959mbu vs. the average trade estimate of 168.4mbu, 172.3mbu last month and 163.5mbu last year.  Despite missing estimates, the total was a record for the month of November, and the daily crush rate of 5.56 million bushels per day was a new all-time record daily crush rate.  Soybean oil stocks were reported at 1.484 billion pounds vs. 1.504 billion expected and 1.326 billion a year ago.  Oil yields remain well above a year ago at 11.64lbs/bu vs. 11.46lbs/bu last year, speaking to higher quality soybeans this harvest.  By the end of November, crush margins had slipped below $1.00/bu which is where they are trading today, which could cast some doubt on crush rates continuing to run at record levels the rest of the marketing year.  U.S. crushers have made hay the last 8-12 months in response to the Argentine drought, but barring another disaster, Argentina should provide 15-20MMT of additional supply to the global crush market this year.

Several outlets making note of the fact the European Union will be a net grain importer this marketing year for the first time since 2007/08.  We took a look at the USDA’s most recent WASDE data for combined wheat and corn trade, opting to leave out barley and oats.  Combined wheat and corn imports this season are forecast at 27.5MMT which would be the largest on record going back to 2007/08.  Combined wheat and corn exports are forecast at 23.5MMT, which would be the lowest total since 2011/12.  These two figures produce a net trade deficit in wheat+corn of 4MMT which is the second largest deficit on record going back to 1986/87 and jus the third deficit ever.  Traditionally, the European Union is an export powerhouse but a drought-damaged crop along with some variable quality is going to curtail shipments this marketing year.  This is going to limit wheat offerings into the Middle East and North Africa later this year while corn imports should be strong the entire marketing year.  The record corn production in Ukraine and Romania should be aimed at the European Union this marketing year, leaving the U.S. to clean up most other global importers until South American supplies come online next spring/summer.

Weather forecasts remain ideal through the end of the year, providing farmers still harvesting an open window and allowing grain movement to remain fluid.  Wheat has been moving, especially in the Northern Plains as the unseasonably warm weather is keeping trucks and trains rolling, especially as producers move grain ahead of year-end cash and tax needs.  48 cars and one train on the spot floor which was unchanged from a year earlier.  Spot floor and to-arrive bids are pretty much equal after the spot had been trading decent premiums, especially for higher protein wheat.  It’s difficult to get too bearish wheat basis from current levels considering the weather will not be this good all winter, exports are much stronger than a year ago, especially off the PNW, and once the grain which needs to move at year end does, producers will most likely wait for higher prices into the new year.  Longer-term, it is easier to get bearish spring wheat basis and futures is spring planting intentions shape up like they appear to be.  However, in the near-term, we should continue to see deliverable stocks draw down through year end which will leave supplies in Duluth/Minneapolis at 7-year lows.


Bottom Line: The market wants more announcements from the USDA on Chinese purchases, but remains to be seen if we will get them before the export sales report on Thursday.  Producers got their second half MFP payment as announced via tweet from the President yesterday.  This is going to provide some liquidity, and probably some resolve to not market, even though January is not a bullish month from a seasonal perspective, especially if the dryness in S-Brazil does not materialize into something bigger than it is today.  Momentum indicators are slowing and downside gaps remain open.


Good Luck Today.

Tregg Cronin

Market Analyst






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